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Better Know a Stock Picker

It's prime time for PRIMECAP.

Welcome, Fools, to part 41 of our several-thousand-part series, "Better Know a Stock Picker," which is loosely, but not too loosely, based on Stephen Colbert's "Better Know a District" from The Colbert Report.

Like Stephen and his thorough investigations into America's congressional districts, each week I take a look at a fund you may want to own. What's on tap this week?

Vanguard PRIMECAP (VPMCX)

Expense Ratio

0.46%

Fund Size

$31.1 bil.

1-year Return

5.26%

5-year Return

8.16%

10-year Return

12.14%

Sources: Vanguard, Morningstar

Top 5 holdings

Company

% of Assets

FedEx (NYSE:FDX)

4.67%

Adobe Systems (NASDAQ:ADBE)

4.40%

Eli Lilly (NYSE:LLY)

3.13%

Potash Corp. (NYSE:POT)

3.11%

Novartis AG (NYSE:NVS)

3.04%

Sources: Morningstar

Meet Howard Schow, Joel Fried, and Theo KolokotronesThe fightin' team at Vanguard PRIMECAP is led by three investing legends, Howard Schow, Joel Fried, and Theo Kolokotrones. They've run the PRIMECAP fund for Vanguard from its earliest days in 1984, producing 23 years of 15% average annual returns. That's more than 2% a year better than the S&P 500 over the same period. Eat that, Wall Street.

But there's more to these Left Coasters -- PRIMECAP is a sub advisor for Vanguard, based in Pasadena, Calif. -- than stock picking 'zazz. Schow, for example, is a native of New York's Long Island, was an Eagle Scout, and served in the U.S. Navy during World War II.

He's also had a long and highly successful career in investment management, spending 27 years at the Capital Group before leaving to create PRIMECAP with Kolokotrones. Fried joined them three years later after a brief stint as a financial analyst with an investment subsidiary of Hughes Aircraft. Twenty-one years later, he's still picking stocks at PRIMECAP.

How they investWith that much time together, you'd think Schow, Kolokotrones, and Fried would have an easy time agreeing on which stocks to buy. But that's not how they work. As Kolokotrones told BusinessWeek in 2000, "The best decisions are made by individuals, not committees."

Practically, this means that each member of the trio gets a slice of the portfolio to manage. That's how Amgen (NASDAQ:AMGN), in which PRIMECAP is building a stake, can exist in the same portfolio as Costco (NASDAQ:COST).

If there's a common thread among this triumphant trio, it's a thirst for bargains. Quoting Fried from the BusinessWeek interview, "When the story is not clear, when there are disappointments, when there's negativism. That's when we feel we can take large positions at attractive valuations."

And then they hold for the multibagger: PRIMECAP turns over just 10% of its portfolio annually. That's a great way to keep taxes low.

Is this fund for you?It's also an excellent strategy for wealth creation. But is it enough for the PRIMECAP trio keep up with the storied record of Peter Lynch? Sadly, that's an apples-to-spaceships comparison. Schow, Kolokotrones, and Fried, with 23 years at the helm, have been at the stock-picking game a decade longer than Lynch led Magellan.

Not that you should care. Two decades of sticking it to the stockinistas is as good a record as you'll find in the fund industry. Combine that with a miniscule 0.46% expense ratio, and really, there's every reason to buy shares.

Except that you can't. Vanguard PRIMECAP is closed to new investors.

But don't worry; PRIMECAP has other funds that are open to new money now. One, also run by Schow, Kolokotrones, and Fried, is a benchmark-beating member of Shannon Zimmerman's Motley Fool Champion Funds portfolio. Want details? Click here to get 30 days of free access to Champion Funds.

And that's today's profile. See you back here next week, fund nation. Good night.

For more Foolish coverage of the investing greats:

Bill Miller's streak may be over, but he's still one the best investors around.

Marty Whitman's willingness to go where others won't has led to huge returns.

Think you can't beat the market with funds? Think again! The selections in Shannon Zimmerman's Motley Fool Champion Funds portfolio are up an average of 36% vs. just 22% for their comparable benchmarks. Ask us for an all-access pass to get an unfettered look at all of Shannon's picks, manager interviews, and model portfolios.

Fool contributor Tim Beyers, ranked 4,466 out of more than 28,000 in our Motley Fool CAPS investor intelligence database, is a regular viewer of The Colbert Report. (Stay the course.) Tim didn't own shares in any of the companies mentioned in this article at the time of publication. All of his portfolio holdings can be found at Tim's Fool profile. His thoughts on mutual funds, Foolishness, and investing in general may be found in his blog. Costco and FedEx are Stock Advisor selections. Eli Lilly is an Income Investor pick. The Motley Fool's disclosure policy is always championship caliber.

Author

Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment. Find him online at timbeyers.me or send email to tbeyers@foolcontractors.com. For more insights, follow Tim on Twitter.